Venture capital research shows signs of optimism among investors

For anyone who has attempted to grow a startup business in Canada — particularly in the technology sector — the answer would have been self-evident: Yes. Absolutely. Positively. Without Question.

When the tech bubble burst more than 10 years ago, Canadian startups witnessed the steady and rapid flight of venture capital. Since then, funding to help turn budding businesses into growing enterprises and tech success stories has been extremely limited, forcing much of the nation’s talented and ambitious entrepreneurs south of the border where they have often been greeted by the open arms of willing U.S. investors.

The VC landscape in Canada has become so bare that many businesses no longer even consider venture capital as a prospective financing resource.

“I would say there’s a large percentage of SMEs for which venture capital is a vague concept to them — not something they’ve sought out or would even know how to,” says Dan Kelly, the president and CEO of the Canadian Federation of Independent Business.

Pundits predicted 2012 to be the year the VC landscape in Canada finally shifted, and they may not be far off the mark.

On Monday, Deloitte released the results of its Global Trends in Venture Capital study with some surprising and reassuring results. Canadian investors’ overall confidence in their country’s macro economic performance over the course of the next year was quite high relative to most other nations. In fact, they were more optimistic about Canada’s performance than investors in China, India, Japan and the U.S. were about their home countries’ performance.

Perhaps even more reassuring is that — with the exception of the U.S. — Canadian investors expressed more confidence in investing in Canada than any other nation involved in the global survey. Similar optimism was exhibited regarding the performance of Canada’s capital markets and the government’s ability to develop public policy that supports economic growth.

“There’s the confidence in your economy and then there’s the confidence that you’re going to be able to raise money in venture capital situations,” he notes.

Indeed, Canadian venture capitalists continue to show a lack of confidence in their ability to raise funds. The numbers aren’t surprising. According to the Canadian Advanced Technology Alliance (CATA), 2011 saw no increase to the $1-billion 2010 figure in new money coming into venture capital funds for investment while, in the U.S., funds for venture capitalists rose 32% during the same period.

Despite the unsteady flow of resources available to them, investments by Canadian venture capitalists’ have been on an incline since the 2008-09 market crash. In 2010 alone, venture capitalists invested $1.5-billion into all types of tech companies, according to CATA.

“That is an improvement, but you’re measuring from the lowest base,” says CATA’s CEO John Reid, noting that VC investments in the tech sector still haven’t returned to their pre-recession levels of $1.5-billion.

Mr. Reid notes that it’s not all doom and gloom, pointing to the federal government’s recent decision to allocate $400 million in VC-designated funds as a means of spurring innovation in Canada.

In addition, the Deloitte report shows that while Canada might not be at the top of international venture capitalists’ lists for investment opportunities, it’s far from being at the bottom. In fact, Canada’s investment attractiveness among VCs was eclipsed only by India, Israel, China, Brazil and the United States.

Yet the question remains: If venture capitalists are showing such great confidence in Canada’s economy, why are Canadian businesses still finding it challenging to source the financial backing they need to become the next great tech giant or introduce the next big scientific breakthrough?

Part of the reason, says Mr. Stewart, can be found in the number of options available to investors. Unlike many of the other countries in which the Deloitte survey took place, Canada has a wealthy and viable natural resources sector that tends to trump interest in VCs.

“Our resource economy has almost certainly had the effect of squeezing out VC investment,” he says. “If you can put money into something that makes you lots and lots of money like oil and gas, you are less likely to seek returns in alternate asset classes like venture capital.”

Other explanations could be more innocuous. As Mr. Kelly explains, many of the CFIB’s members have been unconcerned about the dearth of available venture capital for the simple reason that they’re not currently looking for growth potential.

“We do hear about access to venture capital from a segment of our membership, but I wouldn’t say it’s a huge cry… remember, there are a lot of business that are in survival mode rather than just trying to grow,” he says, adding that while there may not be a hoard of entrepreneurs looking for VCs right now, the CFIB would like to ensure that the capital is there when they need it.

Finally, the widely noted risk aversion of Canadian investors likely isn’t helping matters. Whatever the root cause, the re-blooming of the VC landscape — should it ever take place — is more likely to be a slow, gradual process, predicts Mr. Stewart.

“Our goal is to have a not-bottom-of-the-pack VC community,” he says. “We’re never going to be better on some of these scores than some of these countries who are way ahead of us. So, it’s incremental gains rather than quantum gains.”

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